Everyone needs to play their part

Release date

10 December 2008

Reserve Bank Governor Alan Bollard
said today
that further monetary policy easings depend on all sectors of the economy
responding to reduced demand and not adding inflationary pressures to the
system.

"We need to see inflationary pressures reducing significantly across
the board, if we are to keep on easing monetary policy, thus helping the New
Zealand economy to recover," Dr Bollard told a Wellington business
audience.

"With a global economic slowdown, for some commentators, concerns over
inflation appear to have taken a back seat. Many commentators are of the view
that lower commodity prices and weak economic activity will drive inflation
significantly lower.

"It is worth remembering that for the moment, however, inflation rates
in New Zealand remain very high. In the September 2008 year CPI inflation
reached 5.1 percent, the highest rate since 1990. The higher rates of
inflation are broad-based.

"Common drivers have been: strong world commodity prices; domestic
capacity pressures due to demand; and sizeable price increases in areas not
directly exposed to a high degree of competition, such as local authority rates
and electricity prices."

Dr Bollard said that with substantially lower commodity prices, there is room
for further price cuts. Retail margins could be expected to reflect lower costs
and the current tight environment. He also noted that banks should not be
looking to maintain high profit margins in the current environment. Since July
the Reserve Bank has cut the Official Cash Rate by 3.25 percent. Short-term
mortgage rates have been cut, but not by this much.

"We would hope that the electricity industry does not take advantage of
its market position and keep increasing rates, that local authorities realise
they need to set rates increases below inflation for a change, that the
construction materials industry respond to much weaker demand, that the food
industry react to lower international commodity prices with price cuts, that
petrol companies keep cutting forecourt prices, that the transport industry pass
on fuel price cuts, and that the banks pass on interest rate cuts. Only then
will all these firms be playing their proper role in New Zealand's
recovery."

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